Google Collapse: How Low Can It Go?

Google has now given back $150+ per share and about $50 billion of market cap. How low can the stock go?

First, a recap of what investors are worried about:

• Revenue deceleration. Google's revenue unit growth (paid clicks) decelerated sharply in Q4. 
• Recession. The market is concluding that search won't be "immune" from economic weakness.
  
• Wireless. Will Google dump $5 billion into spectrum and another $5 billion into infrastructure? No one knows--and the uncertainty is freaking people out.
  

Even a deep recession would only likely have a temporary impact on the stock: At some point, advertising would recover, and the stock would, too. Revenue deceleration and/or a radical change in the company's business model, meanwhile, would likely lead to permanent multiple compression.

We think it is unlikely that Google will decide to become a phone company, but it might blow a year's worth of cash flow on spectrum licenses. Revenue unit deceleration, meanwhile, almost always leads to multiple compression--as the momentum investors who have happily tagged along for Google's rocket ride bail out.

How low could the stock go? At a peak of around $750, Google was trading at about 50X 2008 estimated free cash flow of $5 billion. This wasn't crazy, but for a company this large, it was also a momentum multiple. Now that revenue is decelerating sharply, we think Google's cash flow multiple will gradually compress to a more typical 20X-30X. (eBay, another stock that used to trade at 40X-50X, is now down at 15X, so don't fool yourself into thinking that 20X-30X is an absurd fire-sale price).

Where would that leave the stock? 20X-25X $5 billion of cash flow puts you at a market cap of $100-$125 billion, or about $300-$450 a share. Right now, with the stock at $495, the free cash flow multiple is about 30X-35X. This is far from outrageous and might be sustainable, but it also assumes that Google's revenue growth will soon stabilize in the 20%-30% range and that free cash flow will continue to grow rapidly.

PS: TechCrunch asked how we feel about our 10-15 year Google $2000 scenario. Very good, actually. In the months since we published that post, Google's run-rate free cash flow has jumped to $5 billion. Perhaps if the stock gets truly smashed, we'll get a chance to put our money where our mouth is.